By Richard Rubin 

WASHINGTON -- The Senate blocked Democrats' attempt to loosen the $10,000 cap on state and local tax deductions, showing just how tough it will be to change a rule that has frustrated lawmakers and residents of New York, New Jersey and California.

The vote was 43-52, almost entirely along party lines. Sen. Rand Paul (R., Ky.,) voted with the Democrats.

Democratic presidential candidate Michael Bennet of Colorado was the lone member of his party to vote against a resolution that would effectively change the cap. He warned that benefits of repeal would be tilted heavily toward high-income households and that the same money could be better used to directly help low-income households. Rivals Cory Booker of New Jersey and Amy Klobuchar of Minnesota voted with the bulk of the party to weaken the cap. Sens. Elizabeth Warren, Bernie Sanders and Kamala Harris, who are also vying for the party nomination, didn't vote.

Congress imposed the cap in the 2017 tax law that passed without a single Democratic vote, using the money it generated to lower tax rates. Although many people affected by the cap received net tax cuts from the law, some didn't, and the cap became a political rallying cry that helped propel Democratic candidates in 2018.

"New Jersey families shouldn't have to foot the bill for massive handouts for big corporations," Sen. Robert Menendez (D., N.J.) said on the Senate floor.

Wednesday's vote wouldn't have repealed the cap. Instead, using a fast-track procedure that let Senate Democrats demand a vote, it would have repealed a Treasury Department rule implementing the cap.

New York, New Jersey and Connecticut, whose taxes are among the highest in the U.S., had set up programs that would have let residents get state tax credits for donations to government-aligned charitable funds.

Those programs would have effectively let taxpayers convert their nondeductible state taxes into deductible charitable contributions. The Treasury rule shut that down, generally denying federal charitable deductions on the grounds that the taxpayers were getting a benefit in exchange. The rules also pinched pre-existing credit-for-donation programs in states such as Georgia and Alabama that aided schools and hospitals.

Republicans relished a chance to use Democrats' tax-policy talking points against them.

"They want to perpetuate the scam that is a massive giveaway to the wealthiest Americans," Sen. Pat Toomey (R., Pa.), said on the Senate floor. "It's amazing."

Even if Wednesday's plan had succeeded and gotten through the House, President Trump could have vetoed it.

Republicans argue that the unlimited deduction gave a federal subsidy to high-tax jurisdictions. Democrats say the cap is hurting middle-income families, property values and state coffers.

Separately, House Democrats have been developing a plan to repeal or change the cap. They haven't unveiled it yet, and they face challenges ahead.

Full repeal of the cap would deliver more than half the benefits to the top 1% of households, according to the Tax Policy Center, a Washington group run by a former Obama administration official. That impact could be offset by raising top tax rates across the board or making other progressive tax changes, Democrats have said.

Still, Democrats from the Northeast may have trouble persuading those from lower-tax states to back any plan that would shift the federal tax burden from high-income New Yorkers to high-income Floridians.

Write to Richard Rubin at richard.rubin@wsj.com

(END) Dow Jones Newswires

October 23, 2019 16:59 ET (20:59 GMT)